Our smartphones have not turned into credit cards, as many predicted. Instead
payment is disappearing into apps, writes Theo Merz.

Earlier this month, Paypal launched an app which allows users to pay in selected restaurant chains using their smartphones, with a waiter checking their face against a photograph and deducting the bill directly from their account.

This was immediately followed by Zync Wallet, a British start-up operating on a similar system but for independent shops, with integrated loyalty schemes for participating stores. Using a phone to claim discounts is already a possibility on iOS with the ApplePassbook, and Samsung recently announced it would be launching its own version of the app.

It has all taken a different trajectory from the one many predicted a few years ago. In 2011, talk was focussed on NFC - near field communication - chips which would be integrated into mobiles, effectively turning our smartphones into credit cards. Google and Orange both backed the development, launching Google Wallet and QuickTap respectively.

But mobiles as credit cards have yet to really take off, and maybe now never will do. Jeff Mullen, CEO of the US-based Dynamics Inc., a mobile payment developer, suggests this is because people think of their phones as being for communication and do not want to combine this with payment. “Japan’s five years ahead of everyone in terms of mobile technology, but significantly less than one per cent of transactions of in Japan are made with a phone,” he says.

“Why? One reason is that people view their phone as a communication tool. People view payment cards in the same way they view their keys. Until they are comfortable putting those on their phone they wouldn’t put cards on their phone. Also, they might want to give them to someone else.” Security was also cited as a concern among non-adopters of mobile payments when Mastercard commissioned a survey into the area earlier this year.

On top of this, vested interests in the current infrastructure and the pace of change in technology mean developers behind this kind of mobile payment cannot keep up. “Cellphone makers, chip makers, terminal operators and banks have all got competing interests and they all have blocking mechanisms. To change all that infrastructure is very expensive,” Mullen says. “In ten years smartphones will be completely different; we won’t even recognise them. Traditional credit cards will outlast the smartphone in its current form: how will you know how to adapt payments to the phone if it’s going to be completely different by the time you’ve done it?”

Instead the boom has been in people making purchases over their mobile phones: the amount being spent in this way will double over the next year and soon be contributing £1.8bn to the UK economy, according to one estimate. Consumers are comfortable enough to enter their card details into their phones, just not to turn them into their cards.

This has led not only to the development of general payment apps like PayPal’s and Zync Wallet, but also ones for specific purchases: Halo for taxis, KFC for fried chicken, Starbucks for coffee.

A rise in closed-loop payment systems

“The kind of payment that got a lot of attention a while back, where you would tap your phone in a shop to pay, hasn’t taken off,” says Dave Birch, a technology consultant specialising in digital payment. “Meanwhile, payments are vanishing into apps, and that’s gaining ground. Mobile payments are taking off, just not in the way that people thought. There’s an absolute inevitability that people will use apps to pay for for purchases. People don’t think about it. With my KFC app - which I love - you choose what you want and then go and pick it up. The payment just vanishes.”

He offers the example of a potential Tesco app, which would offer deals and recommendations when walking around the supermarket, and take payment as the customer walks out. But with the MasterCard survey showing non-adopters to be confused by the array of payment options, would people really download an app for every seller they deal with? And what about the security concerns cited in the same poll? “Our household spend goes to very few companies; it really wouldn’t be much bother to have an app for each,” he says.

“Security really isn’t a problem either. If your card’s stolen you won’t notice until tomorrow, but if your phone’s stolen you notice in 10 minutes. You’ve got to wonder why anyone's still wandering around with cards, that even have their name on, so if anyone finds it they can say they're you."

While Dynamic Inc.’s Mullen is unconvinced that apps are the future of mobile payments - his own company has developed intelligent payment cards that adapt to how they are being used, making credit cards more like smartphones than vice-versa - he agrees that payment systems are sure to become more fragmented: “I think you will see more and more closed-loop systems being produced.”